Possessing a credit card is more often than not considered a financial blessing for most people because this means that owners of credit cards can purchase whatever they need or desire without the worry of paying for it immediately. This, however comes with its own set of rules and regulations.
Getting yourself a credit card is the easiest part, the tough part is understanding how it works and what the consequences are if you fail to repay your credit card bills on time. People fail to remember that although a credit card is a great financial device, not paying bills on time can result in debts and thereby an unfavorable credit card score and record. This can be the most damaging factor to one’s financial history.
One need not fear or fret over this. The trap of credit card debts can be easily avoided through judicious and prudent use of their credit card and a smart bill management system. Following simple, organized steps with regard to your credit card usage can ensure financial harmony in the long run.
How does one get into a credit card debt?
Debts on your credit card can start accumulating quite early and are based on many factors. Some of the factors which influence debts are as follows:
- Opting for cards that are not suitable for oneself - When you choose a credit card that is not meant for you, it can lead to debts. Most cards come with fantastic benefits and attractive features. However, these might not be advantageous in the long run as they may come with high interest rates or high annual fees or even benefits that we will never need.
- Paying bills post due date - High penalties on bills that are not paid on or before the due date is another very important reason that can lead to credit card debts.
- Barely paying the minimum amount on the outstanding bill - Customers also get into debts by not paying bills on time. Since they are unable to repay the entire amount on time, they end up paying just the minimum amount and the interest gets compounded on the remaining amount. This also results in credit card debts in the long run.
- Spending beyond one’s purchasing power - When you use your credit card for purchasing items that you otherwise cannot afford, it is as good as getting into a debt. You have to repay on the due date and if you have made spends beyond your purchasing power, then this is another route to the path of debt.
What are the consequences of credit card debts?
One of the first consequences of not repaying your credit card bill on time is incurring a late payment fees. if your bill’s due date has passed, you will have to end up paying a late fees. A large interest that keeps getting compounded along with a late payment fees is not a penalty you would want to sign up for. Another due date missed is another new bill to pay.
When you don’t make a payment for an entire billing cycle, it will be considered as 30 days past due date, which your card issuer reports to credit bureaus. Something as simple as missing one single payment can cause a huge drop in your credit score. Therefore, the more payments you keep missing, your credit score only keeps diminishing. There are online tools available where you can check how much your scores can actually fall after late payment of bills. Watching it fall hypothetically can be scary enough to ensure you don’t do it in real life.
After 60 days of not paying your bills, you start receiving frequent phone calls from your creditor asking you to pay your bills. This only worsens over a period of time and the credit available on your card gets completely cut-off if it already hasn’t. Apart from this extra hassle, there’s accumulated interest that has been compounding on your original debt. You already owe much more than you initially did when you received your first bill.
If you continue to avoid paying your bill, the bank writes off the money you owe them as a loss. This is also known as a charge-off. This is one of the worst things you can have on your credit report because this means that you failed to repay a debt. A charge-off is not really the end of the story, you’ll be expected to pay a good amount of taxes on that debt.
After your debt is charged off from the bank, the bank sells it to a debt collector. This is their last attempt at recovering debts from you. There will be a collections team assigned just to recover the money from you. Dealing with the additional stress of having collectors call you, visit you and make you pay is again something, that worthy of dealing with.
If your creditor decides to take legal action against you as an attempt to recover the debts from you, this will result in a judgement being filed against you. This could mean two things - First, get ready to pay a large amount of money and second, “judgement” is the most negative item on your credit report.
Running away from debts on your credit card bills is never the solution. If you have trouble repaying, get in touch with your creditor and try to work out a plan to repay your debts. This will help avoid a credit disaster in the long run.
How does one effectively avoid credit card debts?
Practicing a few healthy financial habits is all it takes to prevent debts on your credit card thereby making sure that your a financially stable and secure. Sound financial judgement is what we need to avoid any kind of debts.
The following steps will help you manage your finances better as well as avoid the debt trap of credit cards:
- Understand how a credit card functions: Yes, they come with a lot of benefits, but you also need to be aware of consequences of not being able to repay on time.
- Avoid owning multiple credit cards: Multiple credit cards means higher balance amount and higher spending power. However, this also means larger bills to repay and higher chances of debts in case you are unable to repay.
- Use the balance transfer facility: Use this facility to transfer your outstanding balance from one credit card to another. Close balances on all credit cards and keep just one for use. This ensures temporary relief from debts. Repaying to one account and remembering one due date is way better than paying to multiple accounts and remembering multiple dates.
- Convert payments to EMIs: There will be times when you will be unable to repay the entire outstanding bill on your credit card. In situations such as these, simply talk to the representative at your bank and explain your financial situation to them. Request for your outstanding bill to be converted to an EMI facility. This is extremely helpful because you will be well aware of the amount that needs to be paid every month. This will also ensure that you have necessary funds in your account.
- Clear those debts which have higher rates of interest: Here is where people make the most common mistake. The first thing that comes to our mind is to clear those debts whose due dates are near. Instead, we must choose to repay those that charge higher rates of interest. This will reduce the overall interest outgo.
- Do not take any cash advance from your credit card: This calls for higher interest rates, higher transaction fees as well as nil grace period. The interest that you have to pay starts getting accumulated from the day you choose to take the cash advance.
Checkout : How to Avoid Credit Card Debt
Today, debts from credit cards are one of the most commonly occurring problems by most customers. These take place due to various reasons. However, if you ensure paying your bills on time, credit cards are the most useful financial tools that are made available to us through banks these days.
Credit cards not only help out in the form of short term loans, but also helps us keep track of our financial habits.